The growing pains of San Francisco’s app-driven amateur car service business

Skift Take

As they strive to make it easier for people to get around and people earn some extra cash, these (paid) sharing services will face their biggest challenge finding success in destinations not densely populated or where taxi and transit systems work well.

— Jason Clampet

Late for a pickup basketball game without a taxi in sight, San Francisco resident Shobeir Shobeiri summoned a nearby driver with a few taps on his smartphone. Five minutes later, Shobeiri, 31, found himself in the back seat of a silver Scion sporting a furry pink mustache on its front bumper.

The car is one of 250 registered to cruise the taxi-deficient City by the Bay for Lyft, a ride-sharing service started in August by Zimride Inc. The 5-year-old company vets people looking to become drivers, connects them with ride-seekers through a software application for Google Inc.’s Android or Apple Inc.’s iPhone, and tracks the trip’s distance using the phone’s GPS to estimate the fare.

Zimride is just one of several venture-backed companies capitalizing on city congestion, high gas prices and a lackluster economy that is leading people to play taxi driver to earn extra cash. And now Zipcar Inc. is examining the sprouting industry as it seeks to move beyond hourly car rentals to reach younger customers who have shied away from buying cars.

“This generation isn’t thinking about car ownership like previous generations did,” Zipcar Chief Executive Officer Scott Griffith said in an interview. “They want and have instant access to a network of mobility options.”

Meantime, venture capitalists invested $164 million in transportation-related technology startups last year, more than double the amount in 2010, according to the National Venture Capital Association. Zimride is backed by investors such as Mayfield Fund and Square Inc.’s Keith Rabois. Other startups include Uber Technologies Inc., which has attracted investments from Goldman Sachs Group Inc., Benchmark Capital and Amazon.com Inc.’s Jeff Bezos with mobile apps for booking rides in black cars.

Amateur chauffeurs

Ride-sharing, where anyone can volunteer to chauffeur passengers in his or her own car for money, has gotten a major lift this year, buoyed by the prevalence of smartphones and mapping technology that makes connecting people more efficient and less expensive. The ride-sharing apps suggest fares, which are optional in order to operate within ride-sharing rules, that are comparable or cheaper than a standard taxi.

Proponents say these apps provide a more streamlined form of carpooling — not a taxi service. It’s an important distinction: Lyft and rival Side.Cr LLC, both of which started in San Francisco, face challenges from California officials who say they violate state regulations for taxi carriers.

Regulators’ concerns

The companies are still running, even after receiving cease-and-desist notices in August from the California Public Utilities Commission. Sunil Paul, Side.Cr’s CEO, described his talks with the commission since then as “productive.” John Zimmer, co-founder and chief operating officer of Zimride, said at least three meetings have taken place between his company’s executives and the state commission.

“We understand their concerns,” Zimmer said. “They said, ‘This regulation was written before this service ever could have been imagined.’” Zimride has also created a program called Lyftvangelist to encourage some of its 10,000 members to lobby for reform.

Christopher Chow, an official at the commission, declined to comment.

Side.Cr, operator of the SideCar app that can tap almost 500 drivers in San Francisco, was prepared for a regulatory showdown. Paul, a former director of nonprofit hourly car-rental provider City CarShare, helped shape a California law passed in 2010 that legalized “personal vehicle sharing.” Paul is also credited in a patent filed in 2000 for electronically booking a car pickup.

‘Radically altered’

“Transportation is going to be radically altered by the smartphone in the next five to 10 years,” said Joe Kraus, a general partner at Google Ventures, which is among investors who have put $11 million into Side.Cr — a list that also includes Zynga Inc. CEO Mark Pincus. “You just don’t have enough cabs on the road. One of the great things about peer-to-peer ride sharing is that it can scale to capacity needs.”

The system has taken off in San Francisco, where tech-savvy citizens are willing to try out smartphone apps before they’re ready for prime time. In addition, the city’s medallion system for distributing taxi-driver licenses limits the number of cabs to about 1,500.

Side.Cr began operating in Seattle last week, and Lyft plans to be in several more cities within a year.

Still, not every city has such limits on taxis. Crowd-sourced rides could also prove impractical outside of major cities, where there is less congestion and people are more likely to own cars because there are fewer public transportation options. And other state and local governments might not take as lenient an approach as California’s PUC has.

Invalid rules?

“If you tried this in New York, you’d go to jail in, like, a day,” said Travis Kalanick, CEO of Uber. “Most reasonable, rational folks looking at the law will say, ‘This totally breaks the law.’ That said, if an agency, like the PUC, doesn’t enforce their own regulations, then you could argue that the rules aren’t valid.”

Uber, a 3-year-old San Francisco-based company with 125 employees, has faced frequent legal challenges as it expanded to some 18 cities around the world. In New York, it was forced to cancel a feature that let people book yellow cabs. The company is preparing to “imminently” release a ride-sharing service, where anyone can apply to drive their own cars, Kalanick said.

Background checks

Drivers of Uber’s luxury sedans, sport-utility vehicles and hybrid cars must obtain the proper licenses through a local agency, and account for worker’s compensation and payroll taxes. Half of the black-car drivers on Uber are self-employed, rather than part of a car-service fleet, Kalanick said. Uber would be able to add cars more quickly if each driver didn’t have to go through an official approval process, he said.

The lack of government oversight hasn’t made the ride-sharing startups a hangout for shady drivers, the executives said. Zimride, which has most of its 32 employees working on Lyft, and Side.Cr, which has about 20 employees, conduct criminal-background checks and multiple interviews with each driver, they said.

Alex Enderenyi passed the tests to join Lyft’s fleet in June, and spends 40 to 50 hours a week picking up passengers in his silver Mazda. Lyft, like its competitors, provided him with a free iPhone when he started — and a giant pink mustache.

To put drivers at ease, Side.Cr is looking to secure a supplemental insurance policy similar to Lyft’s $1 million per- incident plan, said Paul, the CEO. In the meantime, personal auto insurance should cover ride-sharing drivers, and that has been successfully tested during a few of Side.Cr’s 50,000 rides, he said.

As for Shobeiri, who made it in time to his basketball game with help from a $6 Lyft pickup, ride-sharing along with San Francisco’s train system have proven sufficient to cover his transportation needs. Last year, he sold his Infiniti G35.

With assistance from Tara Zorovich in San Francisco. Editors: Jillian Ward, Lisa Rapaport, Rick Schine. To contact the reporters on this story: Mark Milian in San Francisco at mmilian@bloomberg.net; Mark Clothier in Southfield, Michigan at mclothier@bloomberg.net. To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net.